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easyJet (EZJ) shares have breached a 3-month support zone around 1000p to trade levels last seen in late Jan 2013. Investors are taking flight following a FY 2016 profits warning pinned on a weak GBP hindering UK holidaymakers, terror events denting bookings, flight disruption due to strikes across Europe and a still uncertain economic outlook. Management’s message of record passenger numbers, higher load factors, strong profits growth and lower costs per seat just isn’t cutting it, even within a difficult operating environment.
None of the negatives highlighted are really ‘news’ though, having been alluded to by the airline and peers several times this summer. This latest update, however, with specifics on profits guidance (4% lower than consensus), is highly likely to result in consensus financials being revised lower, hurting valuations, target prices and possibly ratings.
A full-year negative FX impact of £90m is a whopping 64% higher (+£35m) since the UK’s June 23 referendum. Having traded sideways since a late June plunge, when investors panicked about how a budget airline so reliant on European destinations would work with a UK HQ post Brexit (not a worry for Dublin-based rival Ryanair), this is another blow to shareholders who had just begun to worry about the prospect of higher oil prices following the recent OPEC production freeze meeting, but still had high hopes the shares would hold up above £10.
Management suggesting second half fuel costs £75-80m lower than last year offsets the FX pain a little, but as one of our contacts points out, airlines traditionally hedge several years out for both currencies and fuel. While its oil hedge has obviously worked, we must ask if EZJ has been wrong-footed by the latest leg down in GBP/EUR? Had it hoped the currency pair would hold around 1.18, which is coincidently 4% above current levels? What if Theresa and her crew deliver more hard Brexit talk sending it even lower? Shares may be off their worst levels but could more turbulence loom?
Mike van Dulken, Head of Research, 6 Oct
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