Interactive Investor

Ryanair rockets

28th July 2014 11:28

Lee Wild from interactive investor

Once the most vilified airline in the skies, Ryanair has adopted a more customer-friendly approach in recent times, and the results are paying off. First-quarter profit smashed City forecasts, and chief executive Michael O'Leary has upgraded full-year forecasts and announced a €520 million (£412 million) special dividend. But he was uncharacteristically cautious, too, so what to make of prospects?

Well, these are terrific numbers. Yes, Easter was particularly strong this year and last year's break fell in the carrier's fourth quarter, so comparisons were easier, but a 152% surge in net profit to €197 million in the three months to June was 28% above broker Davy's forecast for €154 million. Ryanair flew 24.3 million passengers during the period - 1.1 million more than last year - and average fares rose 9%, driving revenue up 11% to €1.5 billion.

It now expects full-year traffic to grow by 5% to 86 million, which combined with better load factors and slightly smaller increase in costs should deliver annual profit after tax of between €620 million and €650 million. That's up from previous guidance for €580 million to €620 million.

"However this guidance, which is about a 21% rise over last year's net profit, is heavily, reliant upon the final outturn for second-half yields over which we currently have zero visibility," warned O'Leary. "We would strongly caution both analysts and investors against any irrational exuberance."

Why? O'Leary talks about "some company-specific challenges" during the second half. That refers to aggressive price cuts anticipated over the typically loss-making winter months - fares are tipped to fall by 6-8% - and capacity growth of about 8% as the budget airline tries to grab more of the business market.

As O'Leary admits, such a fiercely competitive market currently makes it almost impossible to predict demand during the final six months of the financial year. Nevertheless, these results are a good response to last year when Ryanair issued a pair of profit warnings and its first drop in profits in five years. It's completed almost half of a €1 billion share buyback and will now return €520 million back to shareholders, worth 37.5 euro cents per share, probably during the fourth quarter.

At €7.13, Ryanair shares are up 4% on these figures, but Davy reckons they're worth €8. And they could be. The broker has upgraded forecasts for underlying earnings per share (EPS) to 46.8 cents, but even that looks conservative. Some analysts are looking for 50 cents-plus, which would put Ryanair on a modest forward price/earnings ratio of 13.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.