EasyJet up in the clouds

Budget airline easyJet keeps surprising itself. In March, investors were told to expect smaller half-year losses, and now a decent third quarter and a drop in the price of jet fuel means the full-year results should be better than expected, too.

Assuming there's no significant disruption, easyJet now expects pre-tax profit of £280m-£300m in the 12 months to September, compared with the previous consensus of £272m. The airline flew 16m passengers during the three months to end June, up almost 11 per cent on the previous year, generating over £1bn of revenue - almost £100m more than last year. Flying rain-soaked Brits to the sun and running extra flights on more profitable routes in France, Switzerland and Italy also helped, nudging underlying revenue per seat up 5 per cent to £57.58. However, the weak euro cut reported growth to just 2.8 per cent and non-seat revenue fell, meaning easyJet actually made slightly less per passenger and expects about the same in the fourth quarter.

Still, costs rose only 1 per cent at constant currency - less than feared - and renegotiating more than a third of its ground handling contracts should help save £90m this financial year, so, after adding in exchange rate moves and stripping out fuel, costs were actually lower.

Liberum Capital says…

Hold. Volumes remain strong, but underlying fares appear to be struggling - we estimate that on a constant currency basis average fares fell 0.3 per cent. Demand seems very price sensitive and winter 2012 is uncertain. We have increased our full-year pre-tax profit estimate by £20m to £300m, reflecting better-than-expected cost control and a reduced tax charge raises our EPS forecast 13 per cent to 57.2p. However, the valuation is quite full - easyJet shares trade on 9.6 times forward earnings and a much smaller discount to fair value than Ryanair - and, with limited upside to our 562p target price, we move from buy to hold.

Espirito Santo says…

Buy. We have increased our EPS forecasts by 11 per cent for the current financial year, 10 per cent for 2013 and 13 per cent the year after following an encouraging update. We view easyJet as a long-term winner in the European airline industry. In the short term, we see the shares supported by clear positive earnings momentum, with good visibility on forward bookings for the rest of the financial year. In the longer term, there is scope for structural unit revenue improvements from attracting more business travellers. easyJet's valuation is attractive in absolute terms and relative to European peers, so fair value for the shares is now 10 per cent higher at 660p.