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easyJet is flying high

But the shares dipped after record profit numbers from the airline only hit the mid-point of guidance.
November 18, 2015

There were undoubtedly some striking headline numbers in this set of easyJet (EZJ) results. The budget airline posted its fifth consecutive year of record profits, while return on capital employed reached a record 22 per cent. Management was moved to raise the dividend by more than a fifth. But in a sign of just how far expectations have risen the shares fell 6 per cent on results day.

IC TIP: Buy at 1743p

That's perhaps because the numbers only hit the mid-point of profit guidance. But there are also red flags to watch. If the favourable effects of fuel and currencies are ignored, cost per seat rose 3.6 per cent. Chief executive Carolyn McCall said the company would not resort to a knee-jerk cost-cutting drive, as it preferred to "continuously look at our cost base" and work on long-term projects that "allow us to become more efficient".

Larger planes should improve the cost picture. Ms McCall outlined a plan to buy 36 new planes with 186 seats; easyJet's current fleet carries 159 seats per plane. She said the purchase carried the "primary objective of taking market share" from rivals. Some of the planes will replace existing aircraft, while others will help strengthen the company's foothold in airports such as Amsterdam.

Another worry is a potential shift in attitudes to flying and European travel following the Sharm el-Sheikh air disaster and the Paris attacks. Ms McCall said Sharm made up only 0.5 per cent of easyJet's flights, while passengers who had booked flights to Paris were able to alter or delay their plans. She added that "travel recovers" after tragic events, taking history as a guide.

Intriguingly, easyJet has hired its first head of data science. This plays into the company's aim of having the airline industry's first comprehensive online platform on which flights, hotels and other services can be booked and altered, which would enhance its understanding of customer patterns and behaviour. Winning the web traffic war is key, and easyJet was keen to flag a 33 per cent share of all UK airline web traffic on the day its summer 2016 sale started.

Analysts at broker Numis Securities expect pre-tax profit of £752m for the year ending September 2016, leading to EPS of 151p, compared with £686m and 138p in FY2015.

EASYJET (EZY)
ORD PRICE:1,743pMARKET VALUE:£6.9bn
TOUCH:1,742-1,744p12-MONTH HIGH:1,929pLOW: 1,490p
DIVIDEND YIELD:3.2%PE RATIO:13
NET ASSET VALUE:566p*NET CASH:£146m**

Year to 30 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20113.4524852.510.5
20123.8531762.521.5
20134.26478101.033.5
20144.53581114.545.4
20154.69686139.155.2
% change+4+18+21+22

Ex-div: 25 Feb

Payment: 18 Mar

*Includes intangible assets of £492m or 123p a share **Excludes £289m money market deposits