There’s no doubt that investing in budget airlines has been a good choice of late, as both easyJet (LSE: EZJ) and Ryanair (LSE: RYA) shares have more than trebled over the past five years.
Compared to those two, the struggling Flybe (LSE: FLYB) has been a flop, with years of losses leading to an 80% share price fall over the same period. But with 10 June having brought us results for “the first full financial year of Flybe’s three year transformation plan“, could we be looking at a recovery bargain?
Forecasts suggest Flybe will be back in profit this year, with a trebling in EPS penciled in for the year to March 2017 putting the shares on a potential P/E of under 4! That’s still two years away, and a small airline recovery is a risky thing to invest in, but will it come good?
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Flybe reported a pre-tax loss of £35.6m for the year, although £12m of that was from Flybe’s now discontinued joint venture with Finnair, after a reduction in charter business and a planned drop in overall capacity helped knock revenue down by 7.5% to £574m.
More bums on seats
But after a number of adjustments, the company claimed an “illustrative” profit of £16.6m, and it recorded improved passenger statistics with a 3.3% rise in revenue per seat to £51.35 and a 5.7 percentage point rise in load factor to 75.2%. The airline’s cash position is also healthy enough, with total cash of £195.9m as of 31 March. That equates to 90.4p, which seems attractive compared to today’s 58p share price.
We can’t ignore the competition though, so how are the two low-cost rivals faring? Well, easyJet shares have actually been flat since the start of 2014, but even after their terrific rise they’re still trading on a forward P/E of a fairly modest 12 on today’s 1,587p share price, dropping to 11 on 2016 forecasts — and that’s with well-covered dividends of better than 3%.
Ryanair, which has actually gained 62% over the past 12 months, is on a loftier valuation with mooted P/E multiples of 16.5 and 13.5 this year and next on a price of 11.9p, with only a 1.5% dividend indicated for 2017.
I don’t like airlines as an investment generally and I’d really want to see a low-enough valuation to give me a safety margin. On that score, easyJet comes close, and I think it could actually be a decent investment over the next few years. But I’d be steering clear of Ryanair on today’s valuations.
Flybe looks cheap
Putting those two aside, it looks to me like there’s a lot of upside potential for Flybe that’s just not accounted for in the current share price. I can understand why investors are cautious, but chief executive Saad Hammad opined that “Flybe is back on track to recovery and profitable growth” — and he could well be right.
