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easyJet shares set to fly higher

Flights, ancillary and holiday revenues all improve
May 18, 2023
  • Holidays arm to earn £80mn this year
  • Rollout across Europe should follow next year

At first glance, the £415mn pre-tax loss declared by easyJet (EZJ) in its half-year results doesn’t look like huge progress. It is only 25 per cent lower than in the same period a year earlier, when operations were still being upended by the Omicron wave of Covid-19. And that’s despite an 80 per cent year-on-year increase in revenue. 

However, the figures are in some ways a reflection of the improving picture for the airline, given that higher costs are being incurred as it gears up for a much brighter summer.

Bookings have returned to “normalised” levels, the company said. Revenue per seat is set to rise by 20 per cent in the third quarter, with costs per seat expected to be flat. Second-half capacity will also increase by 9 per cent and is expected to reach pre-pandemic levels by easyJet’s September year-end. 

On top of this, the company continues to eke out more non-flight revenue from its customers. Ancillary revenue – charges for cabin bags, leisure bundles, duty-free etc – has undergone a “step change”. It increased by 83 per cent on last year's first half to £940mn. A new on-air WiFi system and a service allowing customers to order directly to their seat should help to push this even higher.

Then there’s the holiday business, which only started meaningfully last year but which tripled the number of customers served to 600,000, generating £173mn in incremental revenue. 

A medium-term target of making £100mn of pre-tax profit from its UK holidays business looks as though it will be hit early, with chief executive Johan Lundgren forecasting an £80mn return this year. EasyJet is also pushing this business out into Europe, starting in Switzerland. Peel Hunt analyst Alexander Paterson thinks France and Germany will follow next year. 

EasyJet’s shares have jumped by around 50 per cent since we highlighted the company as a buy idea last December. However, almost all of those gains were made in January and they’ve traded largely sideways since. On that basis, the recovery looks to have been priced in.

Yet some of the changes it has made – such as cutting capacity at its underperforming Berlin base and redeploying planes onto more profitable routes serving Portugal and the Greek Islands – still have to feed through. The FactSet consensus is for earnings per share to grow by 28 per cent next year and 36 per cent the year after. We think the shares could still fly higher. Buy.

Last IC view: Buy, 517p, 25 Jan 2023

EASYJET (EZJ)    
ORD PRICE:524pMARKET VALUE:£3.97bn
TOUCH:524-525p12-MONTH HIGH:583pLOW: 277p
DIVIDEND YIELD:NILPE RATIO:NA
NET ASSET VALUE:253p*NET DEBT:8%
Half-year to 31 JanTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20221.50-557-57.2nil
20232.69-415-40.9nil
% change+79---
Ex-div:-   
Payment:-