Overweight RYA.I,RYA ID Price: 12.76 Price Target: 16.25 Previous: 13.50 Ireland Airlines Christopher G Combe AC J.P. Morgan Securities PLC Price Performance 12 10 8 6 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 YTD 1m 3m 12m Abs 30.1% 7.4% 12.5% 87.6% Overweight Company Data Price ( ) 12.76 Date Of Price 14 Jul 15 52-week Range ( ) 14.27-6.35 Market Cap ( mn) 18,394.62 Fiscal Year End Mar Shares O/S (mn) 1,442 Price Target ( ) 16.25 Price Target End Date 31-Mar-17 Ryanair High Growth, Low Cost Champion RYA remains well-positioned to deliver outsized growth vs. its European airline peers as the largest scale LCC with arguably the lowest average unit costs (alongside WIZZ). This underscores its ability to pursue further growth which now extends to primary airports as well as an effort to boost its market position in Germany. We believe lower relative costs should also allow for relatively greater retention nearterm fuel cost savings as fuel hedges expire across the sector. Accounting for the recent FY16 guidance upgrade and our DCF-valuation drive a 20% upgrade of our price target which now implies 20% upside potential. Furthermore, RYA has a history of capital return through buybacks (one underway) and special dividends. RYA shares currently trade on 8.9x 12-month rolling forward EV/EBITDAR multiple vs. 10.6x implied by our price target. Our recommendation is Overweight.! Low cost leadership. RYA s cost advantage is most evident in comparison of unit staff and airport costs, a product of both a historical focus on serving lower cost secondary airports as well as greater staff productivity (see Figure 5). We discount flattish unit costs going forward with wage inflation and upward pressure on airport costs offset by volume. The expected rise in airport costs reflects RYA's pursuit of c.50% of its growth from primary airports.! Discounting 7% medium-term capacity growth supported by RYA's low cost model. At the same time, we assume maintenance of current high-end load factors (c.90%) with a modest degree of deterioration over the long-term. This is consistent with management s load factor active/yield passive mantra.! We assume medium-term retention of some fuel cost savings. We calculate a low double-digit decline in the effective rate RYA pays for fuel in the coming year (based on current oil price expectations). While beneficial to the entire sector, we expect RYA to retain more than its peers in FY17 with a modest degree of deterioration thereafter.! Our net income estimate sits at the upper-end of upgrade guidance range. We are lifting our FY16 estimate by 25% to 1.2bn which compares to guidance of 1,175-1,225m, upgraded in early September from 940-970m. Similar to peers, RYA attributed upside to stronger than expected summer traffic and fares while reiterating an expectation for weaker yields in FQ4. Ryanair Holdings Plc (RYA.I;RYA ID) FYE Mar 2014A 2015A 2016E (Prev) 2016E (Curr) 2017E EPS FY ( ) 0.37 0.62 0.69 0.89 1.01 Adjusted P/E FY 34.8 20.4 18.4 14.3 12.7 Revenue FY ( mn) 5,037 5,654 6,108 6,494 6,729 EBITDA FY ( mn) 1,010 1,421 1,505 1,858 2,082 EBITDA Margin FY 20.1% 25.1% 24.6% 28.6% 30.9% EV/EBITDA (x) FY 8.6 15.7 13.2 11.4 9.9 FCFF Yield FY 2.8% 3.6% 2.9% 6.5% 7.7% Dividend Yield FY 0.0% 2.9% 0.0% 0.0% 3.0% Source: Company data, Bloomberg, J.P. Morgan estimates. 31
Table 29: Current vs. previous RYA traffic and yield guidance H1:16e Q3:16e Q4:16e FY16e (y/y change) Old New Old New Old New Old New Traffic (passengers m) 103 104 Traffic y/y 10% 13% 13% 15% 17% 20% 14% 15% Fares (rev / passenger) -4% to -8% flat -4% to -8% -2% to -4% 0.8% to -1.3%* * JPMe implied Source: Company data Table 30: RYA FY16 guidance: JPM 1.2bn net income estimate at top of guidance range Q2:16e H1:16e Q3:16e Q4:16e FY16e Passengers % y/y 11% 13% 15% 20% c15%* Seats %y/y c7.5%* c7.5%* 15% 20% c12%* Load Factor c94% c93% 0% 0% 91% Passenger Average fare 7% 2% 0% -2to-4% -0.8%to-1.3% Net Income (EURm) 1,175-1,225 Table 31: Our FY16 estimate is in-line with consensus while FY17 is 3% ahead (fiscal March) JPM Estimates Bloomberg Consensus JPMe vs. Consensus (EUR m) FY16e FY17e FY16e FY17e FY16e FY17e Revenue 6,494 6,729 6,389 6,632 2% 1% EBITDA 1,858 2,082 1,787 2,084 4% 0% EBIT 1,427 1,610 1,330 1,590 7% 1% PBT 1,379 1,560 1,330 1,549 4% 1% Net income 1,214 1,373 1,211 1,338 0% 3% Source: J.P. Morgan estimates, Bloomberg. Table 32: Our 16.25/share RYA PT implies 20% upside potential (1) EUR m EUR / share NPV 9,961 7.19 L-T growth 2.0% Terminal value 11,085 8.01 Enterprise Value 21,045 15.20 Net (debt) / cash 1,382 1.00 Associates/Other 0 0.00 Minorities 0 0.00 Equity Value 22,427 16.16 (1) Price target rounded to the nearest 0.25/share. See Source: J.P. Morgan estimates, Company data. 32
Table 33: Ryanair financials and operating data FY15-FY17e (EUR m) (fiscal March) FY15 Q1:16 Q2:16e Q3:16e Q4:16e FY16e FY17e Revenue (total) 5,654 1,653 2,417 1,290 1,134 6,494 6,729 Fuel (1,992) (560) (633) (485) (378) (2,056) (1,867) D&A (378) (106) (113) (108) (104) (431) (472) Operating leases (109) (36) (35) (28) (32) (131) (147) Other (2,132) (662) (665) (564) (558) (2,449) (2,632) OPEX (4,611) (1,364) (1,446) (1,185) (1,072) (5,067) (5,119) EBIT 1,042.9 288.4 971.1 105.4 62.3 1,427.2 1,610.0 EBIT Margin 18.4% 17.5% 40.2% 8.2% 5.5% 22.0% 23.9% EBITDA 1,420.6 394.6 1,084.5 213.1 165.9 1,858.1 2,081.9 EBITDA Margin 25.1% 23.9% 44.9% 16.5% 14.6% 28.6% 30.9% EBITDAR 1,530.0 430.6 1,119.3 241.3 197.5 1,988.7 2,229.3 EBITDAR Margin 27.1% 26.1% 46.3% 18.7% 17.4% 30.6% 33.1% PBT 982.4 277.8 958.6 92.9 49.8 1,379.1 1,560.0 Net Income 866.7 245.1 843.6 81.8 43.8 1,214.2 1,372.8 FCF 901 369 1,018 1,192 Net debt (358) (544) (1,382) (2,054) Adjusted Net Debt Operating data** Capacity (seats flown) (mn) 102.6 30.4 31.8 27.1 25.3 114.7 123.9 y/y % change 3.7% 7.5% 7.5% 15.0% 20.0% 11.8% 8.0% Traffic (passengers flown) 90.6 28.0 30.0 23.9 22.1 104.1 112.4 y/y % change 10.8% 15.4% 11.0% 15.0% 20.0% 14.9% 8.0% Load Factor (Pax/Seats) 88.3% 92.0% 94.4% 88.1% 87.4% 90.7% 90.7% y/y % change 5.5pts 0.1pts 0.0pts (0.0pts) 0.0pts 2.5pts 0.0pts Passenger Av Fare 47.04 44.58 66.09 39.99 32.69 47.20 44.75 y/y % change 1.4% -3.9% 7.0% -0.5% -4.0% 0.3% -5.2% ex-fuel Cost per seat 25.5 26.4 25.5 25.8 27.4 26.2 26.2 y/y % change 6.8% 6.8% 3.3% 0.0% 0.0% 2.8% 0.0% fuel Cost per seat 19.4 18.4 19.9 17.9 14.9 17.9 15.1 y/y % change -4.5% -7.6% -3.2% -6.7% -14.5% -7.7% -15.9% 33
Table 34: Our current vs. previous earnings estimates for Ryanair Previous Current Change (EUR m ) 2017e 2016e 2017e 2016e Passenger 4,715 4,913 5,030 3% Other 1,547 1,581 1,699 5% Total Revenue 6,261 6,494 6,729 4% EBITDAR 1,654 1,989 2,229 17% margin 26% 31% 33% -375bp EBITDA 1,525 1,858 2,082 19% margin 0% 29% 31% 3095bp EBIT 1,149 1,427 1,610 23% margin 18% 22% 24% 380bp Net Finance (44) (44) (50) 0% PRE-TAX PROFIT 1,101 1,379 1,560 24% Tax (paid)/received (132) (165) (187) 24% Net Income 970 1,214 1,373 24% EPS, ongoing 0.70 0.89 1.01 21% DPS 0.00 0.00 0.38-2% FCF 429 1018 1192 87% Net debt 4032-1382 -2054-157% Adjusted Net Debt Operating data Seats (m) 109.3 114.7 123.9 8% Passengers (m) 103.0 104.1 112.4 4% Load Factor 94% 91% 91% -350bp Pax Average fare 46 47 45-1% Total Average fare 61 62 60 0% Pax Average total cost 50 49 46-5% Pax Average cost ex-fuel 29 29 29 2% Source: J.P. Morgan estimates, Company data. 34
Ryanair: Summary of Financials Income Statement - Annual FY14A FY15A FY16E FY17E Income Statement - Quarterly 1Q16A 2Q16E 3Q16E 4Q16E RPKs (M) 103,752 113,184 - - RPKs (M) - - - - ASKs (M) 125,391 128,245 - - ASKs (M) - - - - Load factor 82.7% 88.3% 90.7% 90.7% Load factor - - - - Yield 3.65 3.76 - - Yield 0.00 0.00 0.00 0.00 RASK 4.02 4.41 - - RASK - - - - CASK - - - - CASK - - - - CASK ex-fuel - - - - CASK ex-fuel - - - - Fuel cost/gal - - - - Fuel cost/gal - - - - Total revenues 5,037 5,654 6,494 6,729 Total revenues 1,653 2,417 1,290 1,134 Operating income 659 1,043 1,427 1,610 Operating income 288 971 105 62 Net income 523 867 1,214 1,373 Net income 245 844 82 44 EBITDA 1,010 1,421 1,858 2,082 EBITDA 395 1,084 213 166 EBITDAR 1,112 1,530 1,989 2,229 EBITDAR 431 1,119 241 197 EPS 0.37 0.62 0.89 1.01 EPS 0.18 0.62 0.06 0.03 Balance Sheet and Cash Flow Data FY14A FY15A FY16E FY17E Ratio Analysis FY14A FY15A FY16E FY17E Total debt 3,084 4,432 4,032 4,032 RPK growth 7.7% 9.1% - - Cash and cash equivalents 1,730 1,185 1,809 2,481 ASK growth 7.0% 2.3% - - Net debt 1,354 3,247 2,223 1,551 Yield growth (7.9%) 3.1% - - Minority interest 0 0 0 0 RASK growth (3.6%) 9.8% - - Preferred stock - - - - CASK growth - - - - Enterprise value 8,660 22,350 21,099 20,626 CASK ex-fuel growth - - - - a Book value 3,286 4,035 4,884 5,737 Total Revenue growth 3.1% 12.3% 14.9% 3.6% Capex (506) (789) (730) (746) EBIT margin 13.1% 18.4% 22.0% 23.9% Free cash flow 505 632 1,128 1,336 Free cash flow yield 2.8% 3.6% 6.5% 7.7% EV/revenue 1.7 4.0 3.2 3.1 EV/EBITDAR 7.8 14.6 10.6 9.3 EV/EBITDA 8.6 15.7 11.4 9.9 BV/share 2.31 2.91 3.60 4.21 Debt/capital 53.6% 56.3% 50.3% 46.9% Note: in millions (except per-share data).fiscal year ends Mar 35