EasyJet has never really been one for long-haul travel. A rebound in travel post-pandemic has fuelled a recovery in the bottom line, but ensuring more sustained growth in earnings might be harder.
Johan Lundgren, the easyJet boss, can see only clear skies. The budget airline has raised profit guidance for this year for a second time, on the back of a rush in bookings and a boom in air fares.
Adjusted pre-tax profit is expected to be higher than the £260 million that had been forecast by analysts for the 12 months to the end of September. True, all the key metrics have been fired up. Load factor, the percentage of available seats that have been filled, was 10 per cent higher over the first half of the year; the amount of revenue generated per ticket climbed by 31 per cent; and capacity is closing back in on pre-Covid levels as an extra 2.9 million flights were in the air during the second quarter. Capacity is expected to return to 2019 levels during the peak summer months.
The result? Adjusted pre-tax losses narrowed to £415 million over the first six months of the year, from £545 million over the same period last year. Analysts have pencilled in a return to a pre-tax profit of £276 million for the full year, rising to £372 million next year. Investors have latched on to stronger demand. The shares have rallied by just over 50 per cent since the start of this year. Yet an enterprise value of just under four times the earnings before interest, taxes and other charges forecast for 2024 is weaker than Wizz Air, a rival, and is broadly in line with the heavily indebted International Consolidated Airlines Group, the owner of British Airways and others.
A second £1.2 billion rights issue in 2021 has contributed to the shares’ underperformance. Having to stump up £205 million to compensate passengers caught in last year’s travel chaos didn’t help. But far less ambitious expansion plans than Wizz, which is trying to swoop into the western European hubs that easyJet has made its stronghold, is another. The rapid rebound in demand and slower return of capacity since flights were grounded in the pandemic has been enough to turbocharge the recovery for airlines.
For easyJet, revenue per seat was 43 per cent higher over the first half of the year and is expected to rise again by 20 per cent during the third quarter. Focusing on airports where demand is strongest and slots are in shortest supply has provided a lift to the amount that can be gouged out of passengers on ticket prices. About 82 per cent of seats flown by easyJet between January and September have been deployed both to, and from, capacity-constrained airports, according to HSBC analysis, up from 69 per cent pre-Covid. That could help to limit competition for easyJet in the most sought-after airports.
Why does that matter? Because juicing more out of passengers through ticket prices and ancillary services such as extra baggage looks like the main avenue for easyJet to hit a medium-term target of a “mid-teen” adjusted earnings margin.
True, replacing older aircraft over the next five years will result in a fleet that has an average 190 seats, from 177 at present. That could help the margin, as costs associated with bigger jets usually don’t increase by the same magnitude as the take from flying more passengers. But the airline’s ability to control costs in the face of wage inflation is a challenge, even if jet fuel prices are easing.
There is also the question of whether people will continue to wear higher fares, even if 60 per cent of third-quarter capacity and 30 per cent of fourth-quarter capacity have been sold already. It would be foolish to discount the possibility of more disruption at airports. A smooth flightpath is far from assured.
ADVICE Hold
WHY Shaky consumer spending and cost inflation remain risks to profit growth
Integrafin
Integrafin has suffered with a credibility problem, the legacy of an aborted takeover attempt for a rival, a costly overhaul of its software and a surprise £10 million bill for back taxes. Shares in the investment platform provider trade at 19 times forward earnings, a sharp discount to the three-year average multiple of 28.
The FTSE 250 group now stands a better chance of repairing relations with investors. The jump in costs associated with improving its platform infrastructure is expected to peak this year. Most of that comes from hiring up to 50 more staff, which will be complete by the end
of September. The historic VAT bill has been paid and it is appealing against the £2.4 million in extra tax a year it has to pay as a result of HM Revenue & Customs’ unfavourable decision.
Unlike heavyweights such as Hargreaves Lansdown or AJ Bell, Integrafin’s Transact platform is used by investment advisers to manage their client accounts. Just over 80 per cent of its revenue is generated by charging a fee, based upon the value of client accounts on the platform. The group benefits from the same inherent operational leverage as direct-to-consumer platforms; adding more funds has an outsized impact on earnings. Net inflows of £925 million were higher than analysts’ expectations and were the best since the third quarter of last year. Funds under direction were almost 8 per cent higher than at the end of December.
Its ability to capitalise on higher assets has been obscured by heavy investment in staff, but if it can keep to budget then it stands a better chance of benefiting from a recovery in markets and investors’ confidence.
Analysts think last year was the trough for earnings, forecasting a pre-tax profit of £57.3 million this year, up from £54.3 million. What might also help to improve sentiment? Demonstrating the revenue margin is stabilising. Price cuts have left the margin on portfolios of up to £100,000 at 26 basis points and 17 basis points for those over £600,000. The longer-term ambition is for the margin to settle at 25 basis points and 15 basis points, respectively. There is a low bar to impress investors.
ADVICE Buy
WHY Cost pressures may at last be easing
