Profit-takers wrong-footed by Ryanair

It was an horrific weekend for British Airways and any passengers flying BA out of Heathrow and Gatwick. An IT systems failure caused thousands of flights to be cancelled and ruined Bank Holiday getaways.

With angry customers flooding social media with complaints, BA's holding company International Consolidated Airlines bore investors' ire Tuesday, as its shares dived almost 5% from Friday's two-year high 619p.

Ryanair's share price appeared to turn south in sympathy, down as much as 4% to €17.25 following full-year results. However, that was more to do with profit-taking after a stunning run following a chart breakout last month.

And, as a measure of demand for and faith in the Irish budget airline's shares, they've since broken back above €18 again, making a fresh record high by lunchtime.

What a result

Profit after tax of €1.32 billion (£1.14 billion) in the year to 31 March was up 6% on revenues up 2% to €6.65 billion. Unit costs excluding fuel fell 5% (11% including fuel), while average fare fell 13% to €41. All these figures were pretty much bang in-line with consensus estimates.

Load factor - an indication of how full planes are - of an "industry-leading" 94% is impressive compared to the 2016 global average of 80.5%, according to the International Air Transport Association.

Cantor Fitzgerald analyst Robin Byde described the results as "a solid performance despite currency headwinds and security events during the period".

Despite the share's strong run recently, a further €600 million share buyback, due to begin this week, should continue to provide support, according to UBS's Jarrod Castle.

A healthy balance sheet helped Ryanair complete €1.02 billion of buybacks in full-year 2017 and its helped earnings per share (EPS) grow 14% to €1.05.

All well and good, though not particularly exciting. But a cautious outlook – with Brexit negotiations yet to begin in earnest – halted the Irish carrier's recovery since the EU referendum – they're up almost two-thirds since early October - with investors looking to lock in some gains.

Again, Ryanair expects net profit for 2018 to be in-line with consensus at €1.4-1.45 billion, with traffic forecast to grow 8% to 130 million. Average fares will decline by 5-7% due to weaker sterling, but this will be offset by a lower fuel bill, set to fall by €70 million. This will help bankroll fare cuts.

On the Brexit issue - something to which boss Michael O'Leary fiercely objected – Ryanair again warns of the "significant uncertainty over the terms of the UK's departure from the EU in March 2019".

O'Leary adds that he hopes the UK will remain part of the Open Skies policy, which allows any EU or US-based airline to fly between any point in the two regions. However, as the UK has indicated it does not wish to, O'Leary expects further uncertainty over flights between the UK and the EU.

"In the absence of such certainty or direction, we will continue to pivot our growth away from the UK in 2017 and 2018 to capitalise on the many growth opportunities elsewhere in Europe," he continued. "We have contingency plans and will adapt to changed circumstances in the best interests of our customers."

Ryanair shares are up a quarter year-to-date and 70% since its post-referendum low of €10.53. A 16-year low of €1.81 in the depths of the financial crisis back in 2008 is now a distant memory, up almost ninefold since. However, it has led to what now looks an "unattractive valuation," according to Cantor's Byde.

That said, he admits that a forward price/earnings (PE) ratio of 15 times and EV/EBITDAR – EBITDA plus restructuring/rent, the most common valuation of airline stocks – of 12 times are both in-line with long-run averages.

Both Byde and Castle have their target prices under review pending any upgrades to 2018 forecasts, although none are expected. The former, though, is happy to repeat his 'hold' recommendation, while the latter, with a €16 target price previously, puts his 'buy' rating under review.

The European airlines sector has mirrored Ryanair's performance year-to-date and has actually performed slightly better (+31%), suggesting Ryanair's shift towards growth on the Continent could leave it well placed.

Interestingly, since we suggested Ryanair still looked the top pick in the budget airline space, rival easyJet has outperformed, surging 46%. That said, the orange-liveried carrier's half-year results underwhelmed a couple of weeks ago and, at 14 times EPS estimates for 2018, it is not obviously cheap.

The choice between the two is still a key one for airline investors, with IAG worth throwing in, having outperformed Ryanair, easyJet and European airlines sector in 2017 at 38%, even with today's share price fall.

All three, meanwhile, have hammered the FTSE 100 since the turn of the year, according to data from FE Trustnet (see chart below, where: A=FTSE 100, B=Ryanair, C=IAG and D=easyJet).

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.