EasyJet (OTCMKTS: EJTTF) (OTCQX: ESYJY) shares have experienced a bumpy ride recently, much like an airplane navigating turbulent skies. The stock had previously soared by 100% from its October 2022 low to reach 600p, but in the past month, it has dropped by 12% following its latest Q1 update. Despite this decline, we view this as a potential buying opportunity for investors.
Q1 Trading Update: Strong Demand Continues
EasyJet posted another solid set of numbers for Q1, with travel demand showing no signs of slowing down. The company has been increasing its capacity over the past few years, adding more Airbus A320 aircraft to its fleet. In Q1, operating aircraft increased to 324 from 317, facilitating a 4% rise in flights, totaling 133,096.
Passenger numbers also surged, with both seats and passengers rising by 5% and 7%, respectively, to 24.07 million and 21.24 million. The airline’s load factor improved by 190bps to 88.2%, its highest for a Q1 since FY20. As a result, available seat kilometers (ASK) increased by 11% to 30.21 billion, driven by a 6% rise in average sector length to 1,255 km.
Revenue per seat (RPS) rose 6% to £74.36, with passenger RPS up 6% to £52.14 and ancillary RPS increasing 10% to £22.22. This contributed to an 11% increase in passenger revenue to £1.26 billion, a 10% rise in ancillary revenue to £535 million, and a 36% jump in Holidays revenue to £247 million. Total revenue for the quarter amounted to £2.04 billion, a 13% increase. Revenue per ASK (RASK) remained stable at 5.93p.
Costs and Profitability
Cost management also showed positive results. The cost per ASK (CASK) decreased by 4% to 6.27p, driven by a 13% reduction in fuel costs per ASK to 1.65p. Non-fuel costs per ASK declined slightly to 4.61p. However, the cost per seat (CPS) rose by 2% to £78.66, as a 7% decrease in fuel CPS to £20.77 was offset by a 6% increase in non-fuel CPS to £57.88.
Despite these mixed cost trends, easyJet’s bottom line improved significantly. EBITDA doubled to £148 million, reducing traditional Q1 losses. Profit before tax (PBT) rose 66% to -£40 million, and cash levels improved by 47% to £2.80 billion. Net debt remained flat at £484 million, primarily due to payments for aircraft deliveries and prepayments for future deliveries.
Outlook for Q2 and FY25
New CEO Kenton Jarvis struck an optimistic tone about the year ahead, but the market focused on the potential risks. Jarvis’s Q2 guidance pointed to weaker sequential unit revenue trends, as easyJet invests in longer leisure routes. Longer routes generally require lower prices to stimulate demand, leading to lower per ASK yields. Jarvis forecasts a 4% drop in RASK for Q2, which was met with some concern from traders.
Nevertheless, Jarvis remains confident about easyJet’s prospects, expecting ASK to grow by 12% for H1, driven by a 6% increase in seat capacity to 45 million and a 6% longer average sector length. CASK is expected to decrease in both fuel and non-fuel terms, and with the positive timing of Easter in H2, easyJet anticipates a reduced loss before tax for the winter half.
The company’s strong forward bookings for both Q2 (up 2% year-on-year to 57%) and H2 (with seat growth projected at 1% to 58 million and sector length extending by 5%) suggest sustained momentum. Additionally, the Holidays division is seeing record demand, with bookings already at 45% for the summer and an impressive 93% for the winter.
Long-Term Growth Outlook
Looking ahead to FY25, easyJet projects continued growth, with seat capacity expected to rise by 3% to 103 million and sector length increasing by 5%. The company’s total ASK is projected to grow by 8%, and consensus estimates point to a PBT of £709 million. With a solid foundation and promising expansion plans, we believe FY25 will be another strong year for easyJet.
Strategic Investments and Industry Outlook
We believe the broader industry still has significant growth potential. Our base case scenario assumes no recession, continued low unemployment, and positive wage growth, which should fuel travel demand through FY25. EasyJet is well-positioned to capitalize on these trends with its expanding capacity.
A key element of easyJet’s growth is its Holidays division, which has seen remarkable success. In just three years, the division has captured over 5% of the UK packaged holiday market, and the company aims to grow this share to over 10% in the medium term. This growth is crucial for the company’s long-term earnings quality and margin expansion.
Valuation and Investment Case
Following the recent stock decline, easyJet shares are trading at a favorable valuation, with a forward P/E of 7.0, a P/S of 0.4, and a P/B of 1.2. The company’s book value is set to rise with the addition of new aircraft and a focus on debt reduction, making the stock attractive at current levels.
We forecast steady sales growth for easyJet, with a CAGR of 7.2% through FY27. Despite some cost pressures, we expect operating margins to improve from 6.4% in FY24 to 7.1% by FY27. Our estimate for diluted EPS CAGR is 10.6% through FY27, with FY25 EPS projected at 70.2p, growing to 81.7p by FY27. Given easyJet’s strong fundamentals and attractive valuation, we believe the stock will eventually catch up to its potential.
In conclusion, despite recent volatility, easyJet presents a compelling investment opportunity. The company is well-positioned for growth, particularly in its Holidays division, and with an attractive valuation, we believe the stock has significant upside potential.
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