MASTERS IN FINANCE EQUITY RESEARCH RYANAIR HOLDINGS PLC COMPANY REPORT AIRLINES INDUSTRY 8 JANUARY 2016 STUDENT: ANTÓNIO CALEIA [email protected] European aviation market in a Recommendation: BUY restructuring process Vs Previous Recommendation - Price Target FY16: 23.72€ Low-cost carriers with a competitive edge Vs Previous Price Target - The European aviation market is in a turning point. The flag Price (as of 5-Jan-2016) 15.00 € carriers, which at the beginning of the century dominated the 52-week range (€) 9.04-15.30 European air space, are majorly under austere restructuring Market Cap (M€) 19,723.85 processes due to overlong operational inefficiencies, large debt Outstanding Shares (M) 1,319.3 Source: Bloomberg burdens and massive personnel costs. As a consequence, these airliners are cutting back capacity and rethinking the traditional 52-week cumulative return: Ryanair vs MSCI Europe business model for the short-haul segment. Meanwhile, the low- 65.5% cost carriers display financial capability to make significant investments in fleet to both accommodate the expected growth in passengers at their current routes and to penetrate where flag 6.1% carriers are reducing capacity. Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Ryanair will be the airliner with the largest investment in fleet with over 350 aircrafts to be delivered during the next nine years. RYA LN Equity MXEU Index Following the restructuring process of Lufthansa and Air Berlin, Source: Bloomberg Ryanair will be adding significant capacity to Germany’s domestic FY FY FY and international markets. Other markets, such as Scandinavia (Values in € millions) 2015 A 2016 E 2017 F and Central/Eastern Europe are also likely to be key to the Revenues 5,654 6,465 7,135x EBITDAR 1,530 1,985 2,561 expansion of the ultra-low cost carrier, while it will consolidate its EBITDAR Margin (%) 27.1% 30.7% 35.9% market leader position in Southern Europe. Net Income 867 1,221 1,623 EPS (€) 0.63 0.91 1.21 Company description Net Debt (256) (317) 157 Ryanair is Europe’s largest airliner with over 90 million passengers Net Debt/EBITDA -0.18x -0.17x 0.06x carried in fiscal 2015. The carrier operates a comprehensive P/E 20.5x 22.3x 25.6x network of routes across 31 countries with a fleet of more than 300 ROE 21.5% 30.9% 37.2% B737-800 aircrafts. The very efficient cost structure allows Ryanair ROA 8.1% 11.9% 14.3% to offer the lowest average fares in the market, which have an implicit discount of 40% to its closest competitors in Western Source: Ryanair reports and Nova Research Team Europe. The airliner will surpass the 100 million passengers carried this fiscal year and it plans to carry 180 million passengers by 2024. Ryanair has in place orders for additional Boeing 737-800 and the new Boeing 737 MAX 200s, which will increase the fleet to 520 aircrafts in 2024. THIS REPORT WAS PREPARED BY “STUDENT’S NAME”, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT) See more information at WWW.NOVASBE.PT Page 1/34 “RYANAIR HOLDINGS PLC” COMPANY REPORT Table of Contents EXECUTIVE SUMMARY .......................................................................... 3 EUROPEAN AVIATION MARKET AT A GLANCE .................................. 4 RYANAIR HOLDINGS PLC: OVERVIEW ................................................. 5 SHAREHOLDER STRUCTURE ............................................................... 7 GROUP STRUCTURE .............................................................................. 7 RYANAIR’S REVENUES .......................................................................... 8 RYANAIR’S COSTS ................................................................................. 9 FINANCING OF AIRCRAFTS ACQUISITION..........................................10 HEDGING ................................................................................................11 RYANAIR’S STRATEGY .........................................................................12 GERMANY ............................................................................................................ 13 NORTHERN EUROPE ........................................................................................... 13 GREECE .............................................................................................................. 14 CENTRAL AND EASTERN EUROPE ...................................................................... 15 VALUATION ............................................................................................16 INCOME STATEMENT ........................................................................................... 16 BALANCE SHEET ................................................................................................. 21 UNLEVERED FREE CASH FLOW (UFCF)............................................................ 23 DISCOUNT RATE .................................................................................................. 24 ENTERPRISE VALUE, EQUITY VALUE AND VALUE PER SHARE .......................... 25 SENSITIVITY ANALYSIS ........................................................................................ 26 VALUING AN OPPORTUNITY: TRANSATLANTIC ROUTES ...................................... 27 FINANCIALS AND VALUATION KPIS ....................................................32 DISCLOSURES AND DISCLAIMER .......................................................34 PAGE 2/34 “RYANAIR HOLDINGS PLC” COMPANY REPORT Executive Summary . Ryanair is expected to increase its market share in the intra-European air 1.33 1.35 1.24 1.28 1.30 1.18 1.21 transportation market (excluding Russia and Turkey) from 8.3% as of 1.12 1.15 1.09 fiscal 2015 to 12.6% as of fiscal 2024. 12.4% 12.6% 12.6% 11.4% 12.1% 10.4% 10.8% 11.2% . The airliner has on order 364 aircrafts (including options), which will be 9.4% 8.3% allocated in the short-term majorly to Germany’s domestic and international markets. In addition, Ryanair is predicted to increase its presence in Scandinavia, Greece and Central/Eastern Europe during the next decade. FY FY FY FY FY FY FY FY FY FY 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 . Nova Research Team expects that the airliner will carry 170 million Number of passengers intra-European aviation market (in B)* passengers by fiscal 2024, below management team projections of 180 Ryanair market share million. For fiscal 2016, Ryanair is on track to carry 105 million Source: Eurostat, Eurocontrol and Nova Research Tem *It does not include Turkey and Russia passengers. 3,000 1,500 1,786 1,848 668 839 677 - . From fiscal 2020 to fiscal 2023 Ryanair is expected to display a negative (460) (790) (382) (1,500) (1,537) Unlevered Free Cash Flow (UFCF) due to the acquisition of 163 aircrafts (3,000) at total cost estimated to be around 17 B€. (4,500) (6,000) . Despite the negative UFCF, this investment in CAPEX creates value to FY FY FY FY FY FY FY FY FY 2016 2017 2018 2019 2020 2021 2022 2023 2024 shareholders since the ROIC continues to be higher than the airliner’s cost of capital during the period. EBIT Cash Taxes Δ NWC CAPEX Unlevered FCF Values in M€ Source: Nova Research Team 19% 17% 17% 15% . Since a significant part of the investment in fleet will be made to replace 13% existing less efficient aircrafts, mainly after fiscal 2020, the annual growth 11% 11% 9% in seat capacity will start to slow down and so will operating revenues. 8% Consequently, the ROIC will decrease towards the WACC from fiscal 2020 ownwards. 6% . In perpetuity, Nova Research Team expects the ROIC to be equal to FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Ryanair’s cost of capital, since the airliner is not likely to hold its cost WACC ROIC advantage indefinitely. From fiscal 2024 onwards, Nova Research Team expects that Ryanair grows annually by 1.5%. Source: Nova Research Team . An equity value as for the beginning of fiscal 2017 of 31.7 B€ and a value per share of €23.72 was reached. At last, it was performed sensitivity analysis and computed confidence intervals for various parameters used in the valuation model. 50,000 45,000 40,000 35,000 312 30,000 Oil price 18.01 28.55 25,000 20,000 Airport and Handling… 19.51 27.11 15,000 29,379 31,558 31,395 31,707 10,000 Route Charges 21.36 25.32 (163) 5,000 2,179 - Aircraft price discounts 18.31 23.72 Terminal value 19.37 29.61 Load factor coefficient 23.56 23.87 Average fare elasticity 20.98 25.62 Beta of the industry 14.29 42.97 Source: Nova Research Team Source: Nova Research Team PAGE 3/34 “RYANAIR HOLDINGS PLC” COMPANY REPORT European aviation market at a glance In the past the European aviation market was characterized by strict regulations, the domination of flag carriers and a large portion of state-owned airports. All Single Aviation Market – no these features together contributed to the fragmentation of the European air into commercial restrictions in the national markets, which in turn sustained low competition. Following the Single European air space … European Act of 1986, it was created in the 90s a Single Aviation Market for the EU countries, which removed all commercial restrictions for airliners travelling within the region. The aforementioned deregulation greatly contributed to the strong growth in air Graph I: LCCs share of total seats in Europe transportation in Europe over the last two decades