Could Flybe deliver 60% upside?

After crashing into the red last year and issuing a crushing profits warning in January, airline Flybe has managed a partial recovery and looks to have regained its health. Despite fierce competition, it's just confirmed double-digit growth in seat capacity, passenger numbers and revenue during the second quarter, the third consecutive quarter of growth by all measures. That's certainly reassuring, and the City remains confident that the three-year turnaround programme can deliver a profit this year.

After racking up a loss of £35.6 million in the year to March 2015, Numis securities analyst Wyn Ellis expects revenue of £629.5 million this year and pre-tax profit of £3.3 million, giving earnings per share (EPS) of 1.5p. Next financial year it's tipped to be £700 million of sales and a £23 million profit for EPS of 9.5p.

"Flybe has made significant progress with its turnaround programme. It had a £76.7 million net cash position at the end of FY15 with £74 million of gross costs taken out of the business over FY14 and FY15. The route network and fleet have been reconfigured and US$892m of purchase commitments cancelled (at no cost)," adds Ellis ahead of Flybe's interims on 11 November.

And performance is clearly improving. Flybe grew seat capacity by 13.8% in the three months ended September to 3 million seats, passenger numbers by 10.7% to 2.4 million and passenger revenue was up 13%. Yield, or revenue per passenger, rose 2% compared with 0.7% in the first quarter. There was, however, a 2.2 percentage point fall in load factor - a measure of how well it fills its planes - and a 1% decrease in revenue per seat.

Although Flybe has struggled getting rid of its nine Embraer E195 jets - Project Blackbird - progress is finally being made, albeit slowly. Last week, Flybe announced a five-year commercial deal with Rigby group-owned Regional & City Airports. One of the Exeter-based firm's aircraft will serve the Exeter and Norwich airports through eight routes to five destinations from March 2016.

Five of the original fleet of 14 have been handed back to lessors and two have been based at Cardiff Airport since March 2015. The group is in talks to redeploy the remaining six planes.

Since crashing to a low of 52p in May, the shares took off to 99p, nearly doubling in just three months. They've not been immune from the summer sell-off, but support has kicked in at the 200-day moving average and the shares are up 7% Tuesday at 82p. Wyn Ellis rates them a 'buy' and thinks they're worth 132p.

Assuming earnings momentum does pick up, as expected, Flybe shares trade on an undemanding 8.6 times EPS estimates for the year to March 2017. There's a huge dollop of risk here, but this run of quarterly growth inspires confidence ahead of the historically quieter winter months.

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