Constrained capacity has been one of the biggest tailwinds for airlines this year. In the face of tight supply, easyJet is expanding incrementally.
Shareholders will vote later this month on plans for more aircraft orders, which would increase the size of its fleet by just over a third over the next decade. The proposed purchase of 157 aircraft by 2029, and the right to purchase another 100 by 2034, is in addition to an existing order of 158 planes with Airbus.
The purchases are as much about upgrading its fleet, as expanding its absolute size. Replacing its older A319 neo aircraft with the A320 and A321 models, will increase the number of seats per plane from around 179 at present, to somewhere in the low 190s by the end of 2028 and the low 200s by 2034.
The cost of the orders has not been disclosed, but it will be funded via debt, as well as cash generated by the business. The balance sheet is in a comfortable enough place not to cause investors to freak out at the idea of expansion. Unlike its rivals, easyJet was in a net cash position at the end of September, of around £41 million. Cash and undrawn debt facilities stood at £4.7 billion.
The potential cost savings from operating more seats without the commensurate increase in fuel requirements, crew or airports and ground handling costs, is how Johan Lundgren, easyJet boss, expects to increase profitability over the next three to five years.
In that time, the airline is aiming to increase the pre-tax profit it generates per seat to between £7 and £10. It currently sits at around £5. Lundgren reckons increasing seat numbers will add £3 alone.
Increasing the profit before tax generated by its easyJet Holidays to more than £250 million, from £122 million last year, is another area it is targeting. The package holiday business has set a punchy target of 35 per cent for this year, and an increase in the average sales price in the high single digits. Momentum is promising. Early bookings so far this year are ahead annually.
For all the ambition, the market remains sceptical. An enterprise value of just 2.9 times adjusted earnings before interest, taxes and other charges put easyJet at a discount to both Wizz Air and British Airways owner, International Consolidated Airlines.
The outbreak of war in the Middle East caused all airlines to fall. Flights to Israel, Jordan, which have been temporarily paused, and Egypt account for roughly 4 per cent of easyJet’s capacity. It has also hit broader confidence among travellers, and easyJet does not expect first quarter losses to improve this year.
A jump in the oil price is also unhelpful. The airline has hedged just over three-quarters of its fuel exposure for the first half of the financial year and around half for the latter six months, which provides some protection.
There is also the question of whether traveller demand holds up once post-pandemic pent-up demand runs its course.
The post-pandemic bounce-back was more powerful than expected. EasyJet raised profit guidance for last year three times. Passenger numbers during the period were up by around a fifth. The return in demand has not been matched by capacity, which has caused airline fares to soar. The revenue generated per seat was up by a fifth. Load factor, the percentage of available seats that have been filled, rose another 3 percentage points to 89 per cent.
It helped the airline swing back into its first annual pre-tax profit, of £432 million, since the pandemic. Dividends were also resumed.
Yet as analysts at RBC Capital have pointed out, capacity within the European short haul market was already 12 per cent higher year over year during the fourth quarter of easyJet’s financial year. The supply/demand dynamics might not remain quite as favourable to airlines like easyJet over the next year.
Advice: Hold
Why: The shares are cheap, but that reflects the macroeconomic volatility
Paragon
Mention of the buy-to-let market right now turns investors off. For lenders like Paragon Banking that cater primarily to professional landlords, the fear that the jump in interest rates might push a large number of borrowers into arrears has caused a valuation gap to emerge.
Shares in the FTSE 250 constituent have been trading at a rare and persistent discount to forecast tangible book value since the start of this year, standing at 13 per cent.
Yet any doomsday scenario imagined by investors has not materialised. A return on equity of just over 20 per cent beat the lower-end of the group internal target of 15 per cent for the second straight year. The net interest margin widened to 3.09 per cent, from 2.69 per cent.
This year, the lender expects to hold its margin broadly steady at between 3 and 3.1 per cent, although that guidance models for no interest rate cuts by the Bank of England during the period. Even if the funding costs associated with its rapidly growing retail deposit base rises, growth in its higher margin commercial lending business, which spans small housing developers, SMEs and the car market, should compensate, management thinks.
Arrears of more than three months have risen from a low base, still standing at a manageable 0.34 per cent of the buy-to-let loan book. An average loan-to-value ratio of 62.8 per cent across its mortgage book gives a fair degree of cover if borrowers were to default.
The common equity tier one ratio stands at 15.5 per cent, ahead of a target of x per cent. Another £50 million share buyback has been announced for next year. There was another bump in the annual dividend to 37.4p, which leaves the shares offering a potential yield of 7.1 per cent at the current price.
Growth in the loan book has slowed. The group wrote £1.88 billion in new mortgages last year, compared with £1.91 billion the year before. New lending in its commercial finance division was also lower at £1.13 billion, down by around £170 million on an annual basis. But the overall quality of the loan book remains intact.
Advice: Buy
Why: The shares’ discount looks attractive
