What's new:
• Modest profit warning
• Rising capacity at Gatwick is putting pressure on prices
• Solid trading
The profit warning has landed. Analysts at Bank of America Merrill Lynch, who said they expected easyJet (EZJ) to warn on profits for the 2014 financial year, have been proven right. Despite a strong third quarter, during which total revenue grew by nearly 9 per cent to £1.2bn, easyJet chief executive Carolyn McCall said annual pre-tax profits would reach £545m-£570m, slightly below consensus forecasts. The share price fell about 5 per cent on the day these figures hit the market.
Increased capacity, up 6.8 per cent in the third quarter, is to blame for slowing profit growth. Much of the extra capacity is at Gatwick, where the company expects to fly 15 per cent more seats in the second half than last year. That follows the purchase of additional landing slots at the airport from rival Flybe (FLYB) a year ago.
Yet easyJet is trading well: revenue per seat rose 3 per cent at constant currency during the third quarter, while the cost per seat rose just 1 per cent, partly due to higher airport charges in Italy. And the balance sheet remains reassuringly strong, with £603m of net cash at the end of the third quarter. This leaves the company in a good position to consider further investment in its network as well as additional shareholder returns.
Numis says...
Buy. Third-quarter trading, in the context of the recent share price weakness, is reassuring. And investors should be encouraged by easyJet’s positive outlook statement, in which it cites multiple opportunities for growth in its core markets over the next three to four years. Any changes to full-year guidance are primarily due to the company's decision to increase capacity at Gatwick, which strengthens its position at its most important hub. We believe easyJet could return at least £500m of cash to shareholders via special dividends over the next three years.
Cantor Fitzgerald says...
Hold. The ongoing yield pressure at London Gatwick, as easyJet rolls out new services using the recently acquired Flybe slots, is the key worry for investors. The other negative is that the general capacity environment in the European short-haul market is less benign this year. The positive points, in our view, are that easyJet's cost control is tight: excluding fuel, costs should rise just 0.5 per cent in the second half of the financial year. The company is cautious on short-term trading, however, so we expect consensus forecasts for the full year to fall.
