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As good as it gets for Dart?

The travel company has been on a good run but could face headwinds this year.
April 26, 2018

A perennial problem for investors in airlines is that the industry is so responsive to any imbalance between supply and demand that when an advantage opens up for an operator it is normally very quickly competed away. We think that following a recent strong run, this dynamic could soon start playing out for budget airline and package holiday operator Dart (DTG), which also generates 4 per cent of profits from a fresh-veg distribution business.

IC TIP: Sell at 854p
Tip style
Sell
Risk rating
High
Timescale
Short Term
Bull points

Pre-tax profits to beat expectations
Shares at an all-time high

Bear points

Falling ticket yield
Cautious on pricing
Brexit uncertainty
Competitive sector

Dart’s leisure travel business has been a major beneficiary of the collapse of its close rival Monarch at the start of October last year. For Dart, this happily coincided with a 41 per cent increase in its own capacity and the opening of two new bases at Birmingham and London Stansted airports. During Dart’s first half, which finished shortly before Monarch went under, the company offered cut-price deals to ensure its new planes stayed full, which led to 17 per cent drop in ticket yields to £75.95. However, the price of package holidays (which represents just over half Dart’s leisure travel business) was firm, rising 2 per cent, and non-ticket revenue per passenger was also marginally higher.

But trading has really strengthened since Monarch’s failure, with the group saying in February that it expects full-year results to be “materially ahead of current market expectations” thanks to “a more normalised pricing environment after the heavy discounting in the market over the past year”. Coupled with the expansion of its capacity this has contributed to upgrades to 2018’s earnings forecast of over 90 per cent since summer 2016. So it’s no surprise the shares have been flying.   

But, given the characteristics of the industry, it seems apposite to ask how long these good times can last. With demand for flights strong and financing relatively easily available, there’s every incentive for airlines to put on more capacity, creating potential pressure on pricing. However, Dart’s shares seem to be optimistically priced. Based on Bloomberg consensus forecast data, the current forward PE ratio is in the top quarter of the five-year range and is near the top tenth of the 10-year range.

Capacity concerns aside, there are several other factors could weigh on Dart’s performance next year. Margins are expected to come under pressure due to rising accommodation costs affecting package holidays, as well as higher fuel prices due to the strength of oil, and expansion is also adding to costs. Indeed, broker Arden Partners predicts a fall in leisure travel margins from 5.1 per cent in the recently completed financial year to 4.2 per cent in the current year to the end of March 2019. While the broker hopes margins will begin to recover thereafter, we see scope for further uncertainty to emerge in the meantime, especially given Brexit could also cause disruption to the routes the group flies, as well as affect demand in the UK.

DART (DTG)   
ORD PRICE:854pMARKET VALUE:£1.3bn
TOUCH:852-854p12-MONTH HIGH:879pLOW: 485p
FORWARD DIVIDEND YIELD:0.8%FORWARD PE RATIO:19
NET ASSET VALUE:387pNET CASH:£357m
Year to 31 MarRevenue (£bn)Pre-tax profit (£m)Earnings per share (p)*Dividend per share (p)
20151.254028.23.0
20161.4110360.24.0
20171.739059.25.3
2018*2.3510952.06.0
2019*2.648043.86.8
% change+12-27-16+13
Normal market size:3,000   
Matched bargin trading    
Beta:0.31   
*Arden Partners forecasts, adjusted EPS figures