easyJet breaks records again

Demand for budget air travel is booming, and after cheap fuel and a summer rush put a rocket under Ryanair shares following first half results, the same forces have delivered another record year at easyJet. In fact, profit is at a new high for the fifth consecutive year. That's great news, but clearly not good enough to fire the carrier's share price back above resistance at £18.

Revenue rose 3.5% to £4.7 billion in the 12 months ended 30 September, as passenger numbers grew by 6% to 68.6 million. And easyJet certainly packed them in. The load factor - a measure of how well airline fill their planes - hit a record 94.4% in August, and 91.5% annually. 

With a tighter control over costs, £46 million of savings and fuel and currency tailwinds, easyJet has now made a record profit every year since 2011. Profit margin was up 1.8 percentage points at 14.6%. Profit jumped 18% to £686 million, giving earnings per share (EPS) of 139.1p, a fifth higher than last year. Return on capital rose 1.7 percentage points to 22.2%, another record.

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Strengthening the balance sheet further, easyJet generated almost £900 million of operating cash flow over the 12 months, which lowered gearing to 14% . And investors can look forward to a 55.2p per share dividend, which is nearly 22% higher than last year and in-line with its policy to return 40% of its annual profit after tax to shareholders.

However, fierce competition among airlines means easyJet will have to pass a chunk of any savings from cheap fuel - put at £140-£160 million in the current financial year - back to passengers. It's why a drop in tickets prices will cause a "slight" decline in revenue per seat at constant currency during the first half. Higher airport and disruption costs will also likely increase cost per seat excluding fuel and currency by around 2%, and currency shifts will do an estimated £40 million of damage to the bottom line.

Of course, it's too early to guess what impact the tragic events in Paris may have on business but, prior to the attacks, demand had been maintained into the new financial year. Remember, though, disruption in Sharm el-Sheikh will have done nothing to buoy tourism in North Africa - Egypt is just 2.5% of easyJet's business, but Morocco is another 4%, so shifting capacity into the EU is likely.

Chief executive Carolyn McCall expects capacity to rise by around 7% as the airline expands its new bases in Hamburg, Amsterdam and Oporto, while a tight grip on costs should deliver record profits next year, too.

There's clearly lots to like about these full-year results, but not quite enough to blast easyJet shares through technical resistance at £18. Bosses upgraded profit guidance in September from £620-£660 million to £675-£700 million, so some will be disappointed with Tuesday's £686 million.  In 2016, Numis thinks the consensus forecast for £738 million is conservative. The broker reckons it will be more like £752 million.

If they're right, easyJet currently trades on just 11.3 times forward earnings and offers a dividend yield of around 3.5%. The shares are worth 1,850p, says analyst Wyn Ellis, while Gert Zonneveld at Panmure Gordon says 2,000p. Evidence that terror attacks have not deterred travellers - and perhaps a special dividend from new finance boss Andrew Findlay-may be the catalysts for a breakout.

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.