Our latest stock of the week poll features a roster of well-known airline firms and our followers have gone for easyJet (EZJ) by a wide margin. Like all listed airlines, easyJet has suffered severe disruption during the pandemic amid travel restrictions. And while the vaccine rollout has allowed the industry to recover, it’s still not fully out of the turbulence caused by coronavirus (we last wrote about easyJet in February this year). If survival was the watchword for airlines in 2020, the emphasis for 2021 and beyond is to get passenger levels close to pre-pandemic levels. The flight path of recovery has not been even among budget airlines. EasyJet, which is perceived to be one of the laggards, has recently rejected a takeover proposal, which was linked to Hungarian challenger Wizz Air (WIZZ), Morningstar’s preferred European airline.
EasyJet’s recent rights issue, where it is asking shareholders for £1.2 billion, caught investors on the back foot – especially as the announcement was twinned with that of the rejected bid approach. (For more on how companies raise money, see this guide). Shares fell on the news, which is common when rights issues are announced because they usually involve more, and cheaper shares, being available on the stock market. “The rights issue comes as somewhat of a surprise to us given the group had £2.90 billion of liquidity available at the end of June 2021, which suggests cash generation was weaker than expected over summer,” says Morningstar analyst Joachim Kotze, who estimates that the airline has raised £5.50 billion already since the crisis started.
EasyJet Five-Year Share Price
EasyJet is rated as a 4-star stock, which at around 600p per share, means it is trading below its fair value of 1,070p per share. After the rights issue, Kotze estimates that these figures will be 625p and 765p respectively, which suggests there is some upside to the existing price. The risk with rights issues is that existing shareholders end up with more shares which are worth less than before. “Existing shareholders will need to fork out an additional 35% approximately, of their existing position at prevailing prices to avoid dilution,” says Kotze.
As the share price graph shows, easyJet shares slumped in the spring of 2020 (no suprises there), but rallied from autumn 2020 to a 2021 peak of 920p. Vaccines were behind that optimism over travel recovery, but a recent rise in cases in Europe – and reimposition of restrictions by certain countries – has taken the edge off investor enthusiasm for this sector. EasyJet shares are now roughly where they were at the start of the year, especially with recent rights issue taking the wind out of their sails.
EasyJet is the second largest budget airline in Europe after Rynair (RYA), but has taken a more cautious approach to navigating the crisis than its rivals, says Kotze: “It is utilising the coronavirus downturn as an opportunity to embark on the group’s biggest cost-restructuring programme in its history while consolidating its positions at its key airport hubs in the United Kingdom and Western Europe. The group aims to reduce its headcount by 30% and enter into more flexible labour agreements, which will see its costs better aligned with seasonality.” While capacity in the first quarter of 2022 is only expected to reach 60% of pre-coronavirus levels, Kotze thinks easyJet is in a good position to capitalise from the return of business travel, especially with employers keen to get workers travelling again (but at the lowest cost, given the no cost Zoom/Teams alternative).
In the latest Q3 trading update, easyJet did not provide any guidance for the rest of the financial year (full-year results are due in November 2021). The airline blamed ongoing uncertainty in the sector, particularly with passengers continuing to make last-minute bookings depending on the latest travel guidance – compare this with the pre-Covid practice of booking as far ahead as possible to secure the cheapest seats.
